Banking – How safe is your money?

Suppose you sold your house in October, 2010, and netted $300,000 after expenses. Because you won’t be closing on your purchase for a few weeks, you deposit your net proceeds in a savings account at your bank so it can earn interest in the meantime.

Should you be worried whether your $300,000 is protected if your bank fails before your second closing? Yes, you should.

In response to the economic meltdown in the fall of 2008, the FDIC came up with a temporary liquidity guarantee program (TLGP) which increased the insurance coverage on bank accounts generally (including interest-bearing accounts) from $100,000 to $250,000 through December 31, 2009. But the TLGP also provided unlimited coverage for non-interest-bearing accounts (so-called transaction accounts) under the Transaction Account Guarantee Program (TAGP). Within certain time frames in 2008 and later, banks could opt out of the unlimited coverage under TAGP, which some banks elected to do because of the fees charged to them by the FDIC for this extra coverage.

In 2009, the $250,000 limit was extended through December 31, 2013. However, the unlimited protection under TAGP was extended only through December 31, 2010, with banks being given another chance to opt out after the first half of 2010. Because the banking sector seemed to be more stable by mid-2010, many banks opted out of TAGP this past July.

Now, back to your $300,000. Is it or is it not protected? After your first closing, only $250,000 of your $300,000 deposit was covered because it was in a savings account that earned interest. The remaining $50,000 in your savings account is not insured, even if your bank didn’t opt out of TAGP (because TAGP doesn’t cover interest-bearing accounts). To be fully protected, you should move the extra $50,000 in your savings account into a regular checking account and make sure your bank is still participating in TAGP. If it isn’t, consider switching banks.

But, let’s fast-forward to January 1, 2011.

Thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010, banks must participate in TAGP as of January 1, 2011. No longer will banks be allowed to opt out. However, under Dodd-Frank, TAGP will have a limited life of two years, expiring at the end of 2012 – unless Congress extends it in the future.

What this means is during the uncertain economic times we’re in, depositors will need to balance earning interest against protecting principal. Because interest rates are so low, most may prefer the TAGP safety net. Ultimately, decisions will be made in part based on the strength of individual depositors’ banks. A useful tool in finding out your bank’s strength is www.bankrate.com.

By the way, in addition to making TAGP mandatory, Dodd-Frank made permanent the $250,000 FDIC limit for bank accounts generally, including interest-bearing accounts.

- Morrie Erickson